VEECO INSTRUMENTS INC. Management’s Discussion and Analysis of Financial Position and Operating Results (Form 10-Q)


Caution Regarding Forward-Looking Statements



Our discussion below constitutes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in this Report, the words
"believes," "anticipates," "expects," "estimates," "targets," "plans,"
"intends," "will," and similar expressions related to the future are intended to
identify forward-looking statements. All forward-looking statements are subject
to a number of risks and uncertainties that could cause actual results to differ
materially from projected results. You should not place undue reliance on any
forward-looking statements, which speak only as of the dates they are made.

Executive Summary



We are an innovative manufacturer of semiconductor process equipment. Our proven
ion beam, laser annealing, lithography, MOCVD and single wafer etch & clean
technologies play an integral role in the fabrication and packaging of advanced
semiconductor devices. With equipment designed to optimize performance, yield
and cost of ownership, Veeco holds leading technology positions in the markets
we serve. To learn more about Veeco's systems and service offerings, visit
www.veeco.com.



COVID-19 Update



As a result of the COVID-19 pandemic, governmental authorities have implemented
and are continuing to implement numerous and constantly evolving measures to try
to contain the virus, such as travel bans and restrictions, limits on
gatherings, quarantines, shelter-in-place orders, vaccine mandates, and business
shutdowns. We have important manufacturing operations in the U.S. and Singapore,
and sales and support operations in China, Germany, Japan, Malaysia,
Philippines, Singapore, South Korea, Thailand, Taiwan and the United Kingdom,
all of which have been affected by the COVID-19 pandemic.



Measures providing for business shutdowns generally exclude certain essential
services, and those essential services include critical infrastructure and the
businesses that support that critical infrastructure. Our operations are
considered part of the critical and essential infrastructure defined by
applicable government authorities, and, although governmental measures to
contain the pandemic may be modified or extended, our manufacturing facilities
remain open. We believe our diverse product offerings and the critical nature of
certain of our products for infrastructure insulate us, to some extent, from the
adverse effects of the pandemic; however, a prolonged economic downturn will
adversely affect our customers, which could have a material adverse effect on
our revenues, particularly if customers from whom we derive a significant amount
of revenue reduce or delay purchases to mitigate the impacts of the pandemic or
fail to make payments to us on time or at all.



We serve a global and highly interconnected customer base across the
Asia-Pacific region, Europe, and North America. Our net sales to customers
located outside of the United States represented approximately 62% of our total
net sales for the nine months ended September 30, 2021, and 68% and 70% for the
years ended December 31, 2020 and 2019, respectively, and we expect that net
sales to customers outside the United States will continue to represent a
significant percentage of our total net sales. As a result, our business will be
adversely impacted by further deterioration in global economic conditions,
particularly in markets in Asia and Europe.



We are starting to see the effects of the macroeconomic inflationary cost
environment and supply chain disruptions due to strained transportation
capacity, labor shortages and absenteeism associated with COVID-19, and high
global demand as markets reopen and economic stimulus drives growth. These
effects include longer lead times and increased costs. We are taking proactive
steps to manage the impact to our business, including buying in advance and
re-sourcing components on a more frequent basis. We continue to monitor our
global supply chain and may experience additional disruptions in future periods,
which could cause a disruption in our ability to obtain raw materials or
components required to manufacture our products.



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Like many in our industry, we are managing through the effects of the COVID-19
pandemic. Although the full extent of the COVID-19 pandemic's impact on our
business, results of operations, supply chain, and growth can not be predicted
or quantified, we proactively identified potential challenges to our business
and have been executing business continuity activities to manage disruptions in
our business and continue to provide critical infrastructure to our customers.
In response to the pandemic, we have taken, or intend to take, the following
steps, among others, to keep our employees safe and minimize the spread of the
virus, while continuing to serve our customers:



implemented rigorous health and safety protocols in our manufacturing

facilities, including intensive and frequent disinfection of our facilities,

? limit access to our facilities, control the temperatures of individuals

entering our facilities, staggered shifts to minimize employee overlap in

dressing areas and provision of protective equipment;

? Mandatory remote working arrangements for employees who do not need to be

   physically present on the manufacturing floor or at customer facilities;



set up virtual meetings, customer demonstrations and factory acceptances to enable

? customers to review their system data and performance in our factory

   remotely via live video;



? perform remote service and support activities to resolve customer issues

   and enable our customers to maintain their operations;



proactively identified gaps in our supply chain and funded a number of

? components in order to maintain our customer shipping commitments and mitigate

   single points of failure;



monitor our IT systems and implement contingency and disaster recovery measures

? plans to support our IT infrastructure to ensure that our systems remain

continuously operational; and

? continue to monitor and, if necessary, reduce our operating costs and

capital expenditure to maintain financial flexibility and profit margins.




While these steps have been effective so far, there could be additional
challenges ahead that may impact either our operations or those of our
customers, which could have a negative effect on our financial performance,
including productivity and capacity impacts as a result of the ongoing pandemic.
We expect to continue to implement these measures until we determine that the
COVID-19 pandemic is adequately contained for purposes of our business, and we
may take further actions as government authorities require or recommend or as we
determine to be in the best interests of our employees, customers and suppliers.
As a result, we may incur additional expenses in future periods in response to
the pandemic, which could adversely affect our financial position, results of
operations, or cash flows. In addition, we may revise our approach to these
initiatives or take additional actions to meet the needs of our employees and
customers, and mitigate the impact of the pandemic on our business.



Business Update


We categorize our revenue based on the end markets we sell to. Our four end markets are: semiconductors; Compound semiconductor; Data storage; and Scientist and others.



Sales in the Semiconductor market were driven by our laser annealing systems for
leading and trailing node logic, lithography systems for Advanced Packaging, and
our ion beam system for EUV mask blank production. We continue to build momentum
for our laser annealing solutions with advanced node logic customers. We are
currently production tool of record at multiple leading-edge customers for their
most advanced nodes. We also have multiple systems currently being evaluated at
both logic and memory customers for their next nodes. Our lithography systems
for Advanced Packaging are aligned with longer-term growth of heterogeneous
integration, fan-out wafer-level packaging and other Advanced Packaging
applications. We are seeing an increase in demand for our lithography systems
and recently received a multi-system repeat order from a leading OSAT in support
of GPU and high-performance computing device manufacturing. Additionally, EUV
Lithography is critical to the progression of Moore's law, and its ongoing
adoption

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for advanced node, semiconductor manufacturing continues to drive requirements
for our mask blank deposition systems. Overall, we believe that our technology
and market strategy is well aligned with trends such as artificial intelligence,
mobile connectivity and high performance computing that drive the Semiconductor
market. We have experienced growth in this market in 2021 and expect the
Semiconductor market to contribute toward our 2022 growth. Finally, construction
is ahead of schedule at our new San Jose facility, which we believe will allow
us to better meet the demands of our semiconductor customers.



We address the Compound Semiconductor market with a broad portfolio of
technologies including primarily Wet Processing and MOCVD, along with MBE and
Ion Beam, all of which have been developed to support emerging applications such
as 5G driven RF device/filter manufacturing, Gallium Nitride power electronics,
and photonics applications including edge-emitting lasers and micro-LEDs. Sales
in the Compound Semiconductor market were driven by equipment shipments for RF
applications, Photonics applications, and power devices.



Sales in the Data Storage market have been growing for several years, primarily
driven by shipments of Ion Beam systems. Demand for our Ion Beam products for
data storage is being driven by big data and cloud-based storage growth. In
order to be successful, hard disk drive manufacturers are required to improve
areal density of magnetic heads for hard disk drives and are manufacturing
drives with an increasing number of magnetic heads. These two factors taken
together have been driving additional capacity requirements and equipment
upgrades. However, after multiple years of customers accelerating their capacity
additions, including in 2021, we expect revenue to decline from recent levels.
With data proliferation forecasted to continue to grow, however, we feel
confident about the long-term prospects of our data storage business.



Sales in the Scientific & Other market are largely driven by sales to
governments, universities, and research institutions. We are beginning to see
signs of a recovery in this market which we expect to grow more in line with
GDP.



Overall, while demand for our products remains strong, we continue to monitor
and proactively manage actual and potential supply chain challenges related to
the inflationary cost environment and supply chain disruptions. Our laser
annealing, 5G RF, data storage, and advanced packaging lithography products are
all performing well. Long-term revenue growth for 2022 and beyond is expected to
primarily come from the Semiconductor market. As such, we have been making
strategic investments in R&D and inventory, including evaluation systems, as
well as improving our service capabilities, to support anticipated semiconductor
growth opportunities. We also continue to make strategic investments in the
Compound Semiconductor market in order to capitalize on potential future growth
opportunities.

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Results of Operations


For the three months ended September 30, 2021 and 2020

The following table presents revenue and expense line items reported in our
Consolidated Statements of Operations for the indicated periods in 2021 and 2020
and the period-over-period dollar and percentage changes for those line items.
Our results of operations are reported as one business segment, represented by
our single operating segment.




                                             Three Months Ended September 30,                 Change
                                                2021                   2020              Period to Period

                                                               (dollars in thousands)
Net sales                                $   150,246    100%     $ 112,078    100%     $  38,168     34%
Cost of sales                                 87,077    58%         62,936    56%         24,141     38%
Gross profit                                  63,169    42%         49,142    44%         14,027     29%
Operating expenses, net:
Research and development                      21,999    15%         19,129    17%          2,870     15%
Selling, general, and administrative          21,603    14%         19,415    17%          2,188     11%
Amortization of intangible assets              2,976     2%          3,831     3%          (855)    (22)%
Other operating expense (income), net            175     -           (218)     -             393      *
Total operating expenses, net                 46,753    31%         42,157    38%          4,596     11%
Operating income (loss)                       16,416    11%          6,985     6%          9,431    135%
Interest income (expense), net               (7,012)    (5)%       (6,194)    (6)%         (818)     13%
Income (loss) before income taxes              9,404     6%            791 
   1%          8,613      *
Income tax expense (benefit)                     411     -             211     -             200     95%
Net income (loss)                        $     8,993     6%      $     580     1%      $   8,413      *


* Not meaningful


Net Sales

Here is an analysis of sales by market and region:




                                             Three Months Ended September 30,                Change
                                                2021                   2020             Period to Period

                                                              (dollars in thousands)
Sales by end-market
Semiconductor                            $    76,320    51%      $  33,578    30%      $   42,742    127%
Compound Semiconductor                        23,273    15%         26,584    24%         (3,311)    (12)%
Data Storage                                  39,256    26%         36,897    33%           2,359     6%
Scientific & Other                            11,397     8%         15,019    13%         (3,622)    (24)%
Total                                    $   150,246    100%     $ 112,078    100%     $   38,168     34%
Sales by geographic region
United States                            $    48,776    33%      $  39,602    36%      $    9,174     23%
EMEA                                          13,564     9%         14,991    13%         (1,427)    (10)%
China                                         27,261    18%         10,464     9%          16,797    161%
Rest of APAC                                  60,589    40%         46,953    42%          13,636     29%
Rest of World                                     56     -              68     -             (12)    (18)%
Total                                    $   150,246    100%     $ 112,078    100%     $   38,168     34%




Sales increased for the three months ended September 30, 2021 against the
comparable prior year period, primarily in the Semiconductor market. By
geography, sales increased in the United States, China, and Rest of APAC
regions. The increase in sales in the United States was primarily driven by
shipments to data storage customers, while the increase in sales in the China
and Rest of APAC regions were primarily driven by shipments to semiconductor
customers. Sales in the Rest of APAC region for the three months ended September
30, 2021 included sales in Taiwan, South Korea, and

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Japan of $19.2 million, $14.3 million, and $13.7 million, respectively. Sales in
the Rest of APAC region for the three months ended September 30, 2020 included
sales in Singapore of $18.0 million. Pricing was not a significant driver of the
change in total sales. We expect there will continue to be year-to-year
variations in our future sales distribution across markets and geographies. In
light of the global nature of our business, we are impacted by conditions in the
various countries in which we and our customers operate.



Gross Profit



For the three months ended September 30, 2021, gross profit increased against
the comparable prior period primarily due to an increase in sales volume,
partially offset by decreased gross margins. Gross margins decreased principally
due to product and region mix of sales in the period and an increase in spending
to support higher business activity. We expect our gross margins to fluctuate
each period due to product mix and other factors.



Research and Development



The markets we serve are characterized by continuous technological development
and product innovation, and we invest in various research and development
initiatives to maintain our competitive advantage and achieve our growth
objectives. Research and development expenses increased for the three months
ended September 30, 2021 against the comparable prior period primarily due to
personnel-related expenses as we selectively invest in new research and
development and developing additional applications for our technology in order
to be well positioned to capitalize on emerging global megatrends and support
longer term growth in Semiconductor and Compound Semiconductor markets. However,
expenses as a percentage of revenue have decreased when compared to the prior
period.


Selling, general and administrative expenses



Selling, general, and administrative expenses increased for the three months
ended September 30, 2021 against the comparable prior period primarily due to
higher variable expenses associated with the increase in revenue, profitability,
and order in-take. However, expenses as a percentage of revenue have decreased
when compared to the prior year period. Given the uncertainty regarding the
impacts on our business resulting from the COVID-19 pandemic, we are focused on
the proactive management of expenses. In future periods, we may incur additional
selling, general and administrative expenses to support our responses to the
COVID-19 pandemic. In addition, we are currently experiencing duplicate
operating expenses for the transition from our existing facility in San Jose,
California to our new leased facility, and will continue to do so until this
transition is completed over the next several quarters.



Amortization Expense


Amortization expense decreased compared to the same period last year, primarily due to changes in amortization expense to reflect expected cash flows from certain intangible assets, as well as certain other intangible assets becoming fully amortized in 2021.


Interest Income (Expense)


We recorded net interest expense of $7.0 million for the three months ended
September 30, 2021, compared to $6.2 million for the comparable prior year
period. The increase in interest expense was primarily related to the issuance
of the 2027 Notes in May 2020 and the 2025 Notes in November 2020, partially
offset by the partial repurchase and exchange of the 2023 Notes. Included in
interest expense for the three months ended September 30, 2021 were non-cash
charges of $3.7 million related to the amortization of debt discount and
transaction costs of the 2023 Notes, 2025 Notes, and 2027 Notes, while the three
months ended September 30, 2020 included non-cash charges of $3.5 million
related to the amortization of debt discount and transaction costs of the 2023
Notes and 2027 Notes.





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Income Taxes



At the end of each interim reporting period, we estimate the effective income
tax rate expected to be applicable for the full year. This estimate is used to
determine the income tax provision or benefit on a year-to-date basis and may
change in subsequent interim periods.



Our tax expense for the three months ended September 30, 2021 was $0.4 million,
compared to $0.2 million for the comparable prior year period. The 2021 tax
expense included an expense of $0.4 million related to our non-U.S. operations
and minimal expense related to our domestic operations, compared to the
comparable period in 2020 when the expense included a $0.2 million expense
related to our non-U.S. operations and minimal expense related to our domestic
operations.


For the three months ended September 30, 2021 and 2020, the Company's U.S.
deferred tax assets are fully offset by a valuation allowance since the Company
cannot conclude that it is more likely than not that these future benefits will
be realized. The domestic tax expense for both periods is primarily attributable
to the tax amortization of indefinite-lived intangible assets that is not
available to offset U.S. deferred tax assets. The current period foreign tax
expense is primarily attributable to non-U.S operations profits and foreign
withholding taxes on unremitted earnings as of September 30, 2021, offset by the
amortization of intangible assets.



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For the nine months ended September 30, 2021 and 2020

The following table shows the income and expense items presented in our consolidated statements of income for 2021 and 2020 and the dollar and percentage changes from period to period for these items. Our operating results are presented as a single business segment, represented by our single operating segment.

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